10 July 2007

Here's a little secret that Starbucks doesn't want you to know: They will serve you a better, stronger cappuccino if you want one, and they will charge you less for it. Ask for it in any Starbucks and the barista will comply without batting an eye. The puzzle is to work out why.

[The short cappuccino] is the Starbucks way of sidestepping a painful dilemma over how high to set prices. Price too low and the margins disappear; too high and the customers do. Any business that is able to charge one price to price-sensitive customers and a higher price to the rest will avoid some of that awkward trade-off.

The difficulty is that if some of your products are cheap, you may lose money from customers who would willingly have paid more. So, businesses try to discourage their more lavish customers from trading down by making their cheap products look or sound unattractive, or, in the case of Starbucks, making the cheap product invisible.

A firm in a perfectly competitive market would suffer if it sabotaged its cheapest products because rivals would jump at the opportunity to steal alienated customers. Starbucks, with its coffee supremacy, can afford this kind of price discrimination, thanks to loyal, or just plain lazy, customers.

First of all, how did I miss this crucial bit of information, being a more-than-occasional Starbucks consumer? Second, what's the problem here? The author of the above analysis faults SB for making this special bargain 'available only to those customers who face the uncertainty and embarrassment of having to request it specifically.' Isn't this true for basically every type of service profession, and many types of goods? Although America has never really taken to the haggling concept, it's effective for getting better deals on (just from personal experience) car repair, phone service, clothing, printing costs, and airline tickets. Not one of these businesses advertises the fact that lower prices are available for the asking. I understand that for right now, Starbucks = Evil Corporate America, but is this really that different from other, popularly accepted forms of price discrimination?